Banks are full up on SLR and with Recap Bonds, banks holding of bonds will rise further, eating into their net interest income. Recap bonds do not have SLR status and will not fill up HTM books but banks large holding of government bonds at a time of rising yields impede their appetite for bonds as credit is a better alternative for higher interest income. Hence banks may not support government borrowing as they have been doing so, for fiscal 2018-19.
The government will issue recap bonds with 6 different maturities, bonds will have maturity of 10 to 15 years and these bonds will have a coupon of 7.35% maturing in 2028, 7.42% maturing in 2029, 7.48% maturing in 2030, 7.55% maturing in 2031, 7.61% maturing in 2032, 7.68% maturing in 2033. The government will use the proceeds from the bonds to infuse capital in these banks, making the entire transaction cash neutral for the government. The interest offered on 10-year recap bonds have been fixed at 7.35% which is 6 bps below the current rate offered on 10-year G-Secs.
Finance Minister Arun Jaitley announced on 24th January 2018 that the government will infuse Rs 881.39 billion into 20 public sector banks through recapitalisation bonds and budgetary support in the current financial year. A total of Rs 800 billion would be infused in state-owned banks through the bonds this year and remaining amount will come from budgetary support. These recap bonds can be part of held-to-maturity (HTM) portfolio without any limit but are non-transferable and cannot be converted into any other securities. As these are HTM bonds, banks don’t have to take mark-to-market (MTM) profit and loss with the rise and fall in their prices.
Bank Recapitalisation
Central Government has announced a Rs 2,100 billion capital infusion plan for PSU banks and biggest highway construction plan to develop approximately 83,677 km of roads by 2022 with an investment of Rs 6,920 billion to boost the economy. This move comes after India’s GDP growth rate fell to 3 years low, which is well below the levels needed to create jobs for the economy to sustain itself.Central Government has tried to step up public spending for growth and has already exhausted 96.2% of the fiscal deficit target for FY-18, making it essential that private investment picks up.
Private investment has struggled to revive, as state-owned banks that provide much of the credit in the economy, has a pile of bad debt that has reduced their ability to extend new credit. Credit growth as of 20th October 2017 is 6.9% compared with 9.1% a year ago. Bank recapitalization will clear the bank balance sheet problem and will push forward the growth.
Government will capitalise PSU banks in a front-loaded manner with a view to support credit growth and job creation. Capitalisation will be done through budgetary provisions of Rs. 181.39 billion and issuance of recapitalisation bonds of Rs 1350 billion. The balance portion of funds will be raised through raising of capital by banks from the market while diluting government equity (estimated amount Rs. 580 billion).
The bond market is factoring the banks to subscribe to the recapitalisation bonds and the government will use the funds raised from banks to infuse equity into the banks. Deposits get converted to equity and banks will leverage on equity to grow credit, leading to a money multiplier effect that will pull up economic growth through higher demand, both investment and consumption demand.
Projects under Bharatmala Phase-I are to be implemented through NHAI, NHIDCL, MoRTH and State PWDs. Gross Budgetary Support for the Bharatmala program and existing schemes from 2017-18 to 2021–22 will be Rs. 2370.24 billion from Central Road Fund (CRF), Rs 599.73 billion as Budgetary support, Rs. 340 billion from expected monetization through ToT (toll-operate-transfer) route and Rs. 460.48 billion collected as Toll-Permanent Bridge Fee Fund (PBFF) by NHAI. Rs.2090 billion will be raised as debt from the market, Rs.1060 billion of private investments would be mobilized through PPP.
